A Note on Economies of Scale and Natural Monopoly in the Distribution of Public Utility Services

Richard Schmalensee

Bell Journal of Economics, 1978, vol. 9, issue 1, 270-276

Abstract: This note presents a simple model of the determination of the cost of distributing a public utility service to customers spread over a single urban area. Total distribution cost depends on the cost of transmitting services and on the spatial pattern of demand. Everywhere decreasing average cost of transmissions is found to be sufficient but not necessary for natural monopoly. With decreasing average transmission cost, marginal cost pricing (appropriately defined) does not cover total distribution cost, but average distribution cost need not fall with increases in total demand in the area.

Date: 1978
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